From Startup to Scale-up: Key Challenges

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Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.


It’s hard to build a successful startup. It is even harder to turn it into a successful scale-up.

The transition from startup to scale-up poses a new set of challenges, and requires a new set of skills. Here are the problems I see most often at the initial stages of a scale-up.


People


The people problems that scale-up founders face fall within three categories: (a) having the wrong people; (b) not having the right people; and (c) not being the right people. All three are really difficult.

Having the Wrong People. The “wrong people” problem is that the team that helped get the company off the ground is not necessarily the right team to scale the company. Managing this transition is always going to be difficult, because it means that some team members will need to be shifted to positions that they will see as less central, or even asked or encouraged to leave.

Needless to say, this is really hard, particularly if these individuals are, or have become, friends. And it is never going to be pleasant.

I think there are two key elements in handling this appropriately: (a) you need to be as transparent as possible about why there is a need for change; and (b) you need to treat people fairly. As to the former, I think it is possible to tell people directly that they do not have (or do not yet have) the skillset necessary for scaling the company without suggesting that they have failed. It may help if there is a third party, such as an investor or independent director or advisory board member, who can be involved in the process and provide some level of objectivity and intermediation.

With regard to treating people fairly, you need to treat employees whom you are managing out in the same way as you would want to be treated if the shoe was on the other foot (as, at some point, it may be, if your investors decide you are surplus to requirements). This requires a level of respect, appreciation for the contribution that they have made, and a balanced approach to exit compensation, including the handling of any equity grants that they have receive,

Not Having the Right People. The flip side of the “wrong people” problem is the difficulty of recruiting the right people. I think there are several aspects of this:

  • There are not that many people in Europe with the experience of scaling up a startup.
  • While there are many experienced executives who have managed a range of activities for incumbent corporations and have grown their businesses, many find it difficult to adjust to the difference between a traditional corporate environment and an emerging company culture.
  • Your emerging company may need more expensive people than it can afford.
  • You will find it difficult to tell the difference between those who just “talk the talk” and those who can actually “walk the walk”.

There are no easy solutions for these problems, and your skill in finding, and successfully hiring, the right people is likely to be the difference between your business succeeding and failing.

However, a key element in making this work is your network. In my experience, your investors, directors and advisory board members, business friends, professional advisors and others whose judgment you trust are likely to be the best sources of potential recruits.

In addition, there is no substitute for appropriate due diligence. You should talk to past employers and others who are familiar with the performance of the candidate. While there are sometimes constraints on your ability to do so (e.g., where the individual is currently employed and is very concerned about confidentiality), there is usually a way to manage these problems (for example, by limiting your initial discussions to an agreed list, obtaining views on a long-list of individuals that include your preferred candidate, raising the topic in a way that does not seem employment related etc.). In checking references suggested by the candidate, even short silences in response to specific questions can speak volumes.

Not Being the Right People. Founders also need to be brutally honest in self-assessment. For example, you may have had the right skills to be the CEO or COO of a startup, but may not be the right person for that role when the business is scaling up (or, at least, may need support or training). So, in considering how the organization needs to be reshaped to scale up, don’t forget your own roles. If you need to develop additional skills to perform, consider how you will do so, and whether you actually are capable of doing so. You are key owners as well as managers of the company, and you need to do the right thing for the business even if it means that you should move into different capacities.


Processes


In an early stage startup you may be able to get away with a certain amount of disorder. Some of this will cause you problems and delay when you do a Series A financing http://bit.ly/FundingPrep, and it may be expensive to fix things that should have been done properly in the first place, but a modicum of company untidiness isn’t likely to kill your business.

However, when you are scaling up it becomes much more important to make sure that key processes are appropriately handled. You really do need a proper CFO who is on top of the finance and accounting, a proper COO overseeing operational matters, a head of sales with clear targets, and clear delineation of responsibilities for all of your other key functions.

Some founders may resist this level of formalization as inconsistent with the nimbleness of a startup. However, the reverse is true – in a scale-up, the founders can only retain the ability to move quickly and strategically if they don’t become bogged down in putting out administrative fires or otherwise cleaning up after messes.


Delegation


A corollary to the two points above is that founders need to learn to delegate, and not just in respect of administrative matters. In a startup, founders can get accustomed to doing it all themselves. In a scale-up, having hired the right people, founders need to learn to delegate, with oversight. You can’t do it all yourself. You need to trust your people, while exercising sufficient oversight so that you are confident that they continue to deserve that trust. Needless to say, you also have to be prepared to take appropriate action if they lose your trust.


Culture


Maintaining culture is easy in a small startup – you can all sit around a conference table and go out for a beer together. However, keeping a consistent company culture becomes much harder as you grow and hire people quickly, and it is easy to lose the values that you as founders see as key to your business. Consequently, you will need to think carefully about what elements of culture distinguish your company, and what steps you will take to maintain culture.

There is no “one size fits all” solution to this problem. The one thing that is clear, however, is that this is not a problem that will take care of itself. If you fail to address company culture in an organized way, you will find over time that you have lost the essence of what distinguishes you as a company, as your new arrivals swamp the original team.


Conclusion


The teams and skillsets required for running a scale-up are very different from those needed to run a startup. Founders addressing scale-up issues need to take a long and hard look at their organizations, and make sure they understand what they will need to succeed.

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact robert.mollen@friedfrank.com.

You will find a listing of Bob’s weekly startup blogs on US and international expansion and early stage financing here: http://bit.ly/StartupGuidesIndex

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